Posts Tagged 'defined contribution pensions'

Financial experts are predicting a surge of pension savers accessing their nest eggs in April, with the first few months of the freedom changes taking effect potentially seeing a massive £6billion taken from pension funds.

With this comes a real fear that fraud will increase dramatically as many are tempted by ‘too good to be true’ offers of great returns on their investment if they take money from their pension pots and reinvest in unscrupulous schemes.

The Channel 4 program, Dispatches, will tonight have a special on the impending pension changes and how many will use the relaxing of the rules to withdraw large sums of cash from their pensions.

Whilst many will have taken financial advice before making such a big step, there is concern that many will not fully understand the tax implications of withdrawing money from their nest egg, and that such withdrawals make take them into a higher tax bracket.

The program tonight will feature one of the partners at Hymans Robertson, Chris Noon, who will say that around triple the amount of pension savers than the Government had first thought will take advantage of the pension freedom, rather than buy an annuity which offers a guaranteed lifetime income in retirement.

Whilst the Treasury hasn’t backed the claims of Hymans Robertson, it does acknowledge that around a third pension savers would withdraw their full pension pot quicker than an annuity would.

Not all financial experts agree on the amount of money that will be released from defined contribution pension pots, the over-55s organisation, Saga, has predicted that £1.5billion will be released during the first year of the pension reforms, where people will choose to either spend the money, help family out financially or reinvest some of their pension pots.

The Dispatches research found that nearly half of over-55s questioned said they were intending to withdraw some or all of their nest egg.

The program also discovered that around half of the people had also been approached by unregulated companies offering various investments for their pension, leading to concerns that many pensioners will be duped out of their retirement income if they choose to invest in unprotected schemes, which in most cases fail to explain the tax implications of withdrawing your pension and any charges they apply to their schemes – which could leave unlucky pensioners thousands of pounds worse off.

These unregulated firms tend to target people by spam emails, texts, cold calls or tempting websites.

Most of the people who plan to withdraw large amounts from their pension fund are doing so for a specific reason. Home improvements, exotic holidays, helping out relatives and buying large purchases such as a new car tend to be the reasons given for wanting to access their pot early. This has prompted fears that many pensioners will run out of money in later life and have to solely rely on the state pension.

Along with the recent changes to the way pensions can be accessed, Steve Webb, the Pensions Minister, is keen for those who move companies regularly can get value for money from their pension pots.

Around 20,000 workers each year change companies with less than two years’ service under their belt. Employers often force the ex-employee to cash in their pension in what is called a ‘short service refund’, where they will be refunded their employee contributions, but not the employers’ contribution.

However, Mr Webb, feels that this is unfair to a large section of workers who don’t get the chance to build up a sizeable pension pot and could potentially miss out on tens of thousands of pounds of retirement income, though lack of employer contributions towards their nest egg.

Under the Government’s new plans, only workers with less than 30 days service will be allowed to get a refund of their pension contributions.

With the average person now working for 11 different companies over the course of their lifetime, more and more people are finding themselves with multiple pensions pots or have missed out on building up a decent retirement fund because they have been forced to withdraw their contributions from the scheme.

Even if they have 11 smaller pension pots, all of those pots will be working for them and building up a pot.
The average size of a pension fund when a short service refund is taken is between £1,000 and £2,000, with a typical refund of around £625 to the employee.

Even if the £625 is then put straight into the new company’s pension scheme, the employee will still have missed out on two years’ worth of employer’s contribution which over the years, and with several different pots, could amount to a lot of money.

The changes to the system are likely to come into effect in October 2015, six months after all the other pension reforms take effect.

However, the changes will only apply to defined contribution workplace schemes, not final-salary schemes or personal pensions.

Mr Webb has gone on record as saying that in the future he would like to see a set up where any workplace pension contributions are automatically forwarded to a new company’s pension scheme, so the employee doesn’t lose out on any contributions and get the maximum amount of returns for their contributions over the years by having one large pot, rather than several smaller ones.

According to a new report, the perfect amount of retirement income is £17,500 a year.

This amount will afford the majority of people an excellent standard of living during their later life.

The report from Barclays Bank, shows that most people’s expectations reduce when they retire and they tend to leave a more modest lifestyle that is easily funded by £17,500 a year.

The report found that most people’s requirements in retirement was to be free from debt, have a reliable motor car and take a two week foreign holiday each year.

More than 2,000 workers were surveyed for the study, each of whom is paying into a defined contribution workplace pension.

The Bank calculated that to enjoy the lifestyle they wanted to live in retirement the average person would need around £17,500 a year. To achieve this, a person would need to have accumulated a pension pot worth £350,000 based on the latest annuity rates.

Under new rules announced in the Spring budget, pension savers no longer need to buy and annuity or drawdown product once they retire and they can access their entire pension pot as they see fit, although they will be subjected to income tax if they go over their personal allowance.

However, many retirement experts are concerned that people are not saving enough into their pension pots and will not be able to build up enough savings to enjoy a comfortable retirement.

In addition, many are overestimating how much their pension pot will yield when they retire and underestimating how long that pot has to last.

Many do realise that they may need to work for longer to fund their retirement, and almost 80% of people surveyed by Barclays admitted they expected to have to continue working much later in life than their parents did.

More than half of those questioned felt they would need to seriously budget during their retirement as they wouldn’t have built up a big enough pension pot to enjoy their current level of living.

A spokesperson for Barclays, Jonathan Parker, said that younger workers needed to take a good look at their financial situation to ensure they will have saved enough to enjoy a financially safe retirement, rather than start to worry about it much later down the line when it will be too late to address.

With the continuing success of Automatic Enrolment more workers than ever are now contributing towards a workplace pension. The Barclays’ report suggests that in order to achieve a decent standard of living in retirement that people increase the amount of money they contribute towards their pension schemes from 8% to 12%.

Steve Webb, the Pensions minister, has warned that unless salary-linked pension schemes are made cheaper for employers to run, they will become a think of the past.

The minister has announced plans to help to save final-salary pensions by removing some of the legal obligations that surround them.

In addition, he wants companies to improve their lower grade pension schemes to make them more enticing for employees.

There are currently only approximately 1.7 million workers in the private sector who still contribute towards a final-salary pension scheme. In contrast, more than 5 million workers had a final-salary pension in 1995.

Under the minister’s new proposals, bosses wouldn’t be required to give annual inflation increases to its pension holders, nor would they be required to continue to provide pensions for the former employee’s spouse on their death.

It’s hoped that these moves will encourage more companies to continue with final-salary pension schemes, rather than switch new members of staff over to defined-contribution pension schemes instead.

Mr Webb hopes that the new legislation will be in place before the next general election in 2015.

Millions of people in the UK are currently being included in the automatic enrolment initiative whereby all UK companies must provide a workplace pension scheme for their employees unless they choose to ‘opt out’ of the scheme.

The majority of these schemes will not be linked to salaries, but be a defined contribution pension.

There are concerns that the contributions made by employees will be kept at the minimum will which mean fairly low pension pay outs.

It is hoped that the new plans will encourage business to provide income guarantees for their employees in their workplace pension schemes. This in turn, will mean that people will have larger pension pots when they come to retire.

The Government is also looking at bringing in a ‘Dutch style’ pension where companies can join together to offer large-scale pension schemes to their staff aimed at a certain level of pension income.

These ‘Collective Defined Contributions’ are seen as cheaper to run for employers and have less risks attached for the employees.

In addition to collective defined contribution pensions, the Government also wants to introduce two more pension products: ‘Flexible Defined Benefit’ pensions which will be salary linked, but less legal obligations for employers such as paying out to spouses if the member dies and annual inflation-linked increases to pensions, and Guaranteed Defined Contribution pensions, which guarantees the future value of the pension pot to employees.

Many of the large pension providers have welcomed the proposals saying that it will offer more choice to employers.

According to data released by the Office for National Statistics (ONS) there are now fewer people contributing towards a pension fund since records began.

The ONS reveals that less than half of workers (46%) in the UK pay into a workplace pension scheme, whereas 10 years ago the figure was 55%. Even though the population in the UK is greater, pension scheme membership dropped to 8.2 million in 2011, the lowest level recorded since the 1950s.

However, the fall in pension savings is almost entirely made up from the private sector. There are currently less than three million employees in the private sector who have a workplace pension, compared to over 8 million in 1967.

To further the gap between private and public sectors in terms of pension savings, public sector pension membership has actually grown by over a million from 1995 and stood at 5.3 million in 2011. This figure also takes into account large corporations such as the Post Office and the BBC who were classified as public sector, but are now private sector.

One of the reasons for the reduction in pension membership in the private sector is the abolishment of many of the more final salary pension schemes, where businesses have swapped over to ‘defined contribution’ schemes instead to save money. Defined contributions schemes do not accumulate as much savings as final salary schemes and they are also much more financially risky to the individual.

The ONS also found that employees who did have a private pension scheme were now contributing less due to the economic climate. £8,8 billion was put into pension funds in 2011-2012 compared to £10.2 billion in 2007-2008.

Public sector workers are also getting better at saving for retirement, two years ago only 11% of workers in the public sector were contributing over 7% of their wages, but this figure rose to 37% last year.

However, it was self-employed people who were the worst at saving for retirement. Only 34% of self-employed men had a private pension scheme in 2011.

The news comes as a stark warning, particularly as the Association of British Insurers published a survey which found that 20% of employees think they will not have enough pension saving to retire on.

The Government’s auto-enrolment scheme started last year and expected to be completely by 2017, is anticipated to get 11 million workers from the private sector to start saving for retirement.

According to research carried out by the National Association of Pension Funds (NAPF), the speed of closures of final-salary pension schemes in the UK had increased in 2012.

The group’s survey of 1,018 final-salary schemes managed by 280 different private sector companies discovered that just 13 per cent of final-salary pension schemes were currently available for new members—a significant drop from the 2011 figure of 19 per cent

It was a similar story when it came to final-salary pension schemes being offered to existing members of staff, with 31% of schemes closing their doors compared to 23 per cent in the last annual survey.

The NAPF predicted the closure of final-salary pensions would continue to increase and that any new members of staff in a private sector company would have a very limited chance of being able to join such a scheme. Nearly all of the UK companies listed in the FTSE 100 index no longer offer final-salary schemes to new employees.

The NAPF’s chief executive, Joanne Segars, said: “What was once the norm is now a very rare offer. And those who are currently saving into one may find it gets closed.”

The NAPF have laid some of the blame of the demise of final-salary pension schemes at the Bank of England’s aggressive quantitative easing programme (QE), which over the past four years it’s been running has forced many of these schemes into huge deficits.

In addition to the QE programme, the increase in life expectancy has also made final-salary schemes more expensive to run, and as people continue to live longer on average, the NAPF expects more schemes to finish in the future.

The group predicts that approximately half of the companies currently offering final-salary schemes will stop offering them to new employees and offer defined-contributions schemes instead.

In addition to this, the NAPF predicts that around thirty per cent of companies who do have their final-salary schemes available for existing employees, will either close the schemes to any new contributions or decrease the value of the benefits to make them cheaper to manage.

The Office for National Statistics (ONS) has recently published its own findings on final-salary pensions.

The ONS found there are 27 million employees in Britain with a workplace pension scheme, with either active or dormant accounts, or drawing their pension.

Whilst the ONS doesn’t say whether final-salary schemes have been closed or not, it does show how much membership of a workplace pension scheme has declined.

The study shows that membership of a company pension scheme has dropped by 3.6 million since 1991 with 6.5 million down to 2.9 million in the twenty years to 2011.

Of employees who were still contributing towards a workplace pension; 1.9 million are members of final-salary schemes and 1 million employees are members of defined-contribution pension schemes.

Figures from the Office for National Statistics (ONS) show that the retirement gap in the UK is widening, as the number of people with private pension funds dropped 17% in just one year.

Currently only 3 million people in the private sector have a private pension fund, this is 600,000 less than the number in 2008.

The number of workers who were in pension schemes was on the increase at 6.2 million in 1995 but had fallen to 3.6 million by 2009. This then fell by 17% in 2010 to 3 million.

The trend in decline of private sector pension has been partially blamed on the collapse of the gold plated final salary schemes that many companies offered. Most company pension schemes are now the new ‘defined contribution’ (DC) schemes where the pension is worked out as an average of the salary through a person’s lifetime rather than their final salary at retirement.

Less than 10% of private sector employees still hold a final salary pension, whereas in 1997 it was a third. In contrast, most public sector workers have a final salary pension.

The ONS report reveals that those with defined contributions schemes have an average of 6.2% of their pay put into their pension fund by their employers, but final salary pension holders have 15.8%

Many experts worry that because people live longer these days coupled with the low annuity rates currently on offer and the lower employer contribution rates, the next generation will be retiring on a much lower standard of living than those retiring now.

Self-employed people in the UK have also started to cut back on private pension savings, where before they were biggest contributors to pension funds. The ONS reports that in 1998 64% of self-employed males had a private pension scheme, but by 2010 that number was just 37%.

It seems that in the private sector, company pension schemes are now becoming something that only the richer amongst us can afford. The ONS data show that 75% of men earning at least £600 a week had a private pension, however for those earning less than £300 the figure dropped to just 14%.

This announcement comes just before the Government is due to commence with the Automatic Enrolment pension scheme. The new scheme, which starts in October for large companies, has workers automatically entered into a private pension scheme unless they choose to opt out. Both the workers and the employers will contribute to the pension pot, which starts at 1% of salary and will rise to a combined total of 8% by the year 2018.

However, the new auto-enrolment scheme is not without its critics. Many industry experts fear that low paid workers will end up with a very low return, and because the pensions will be based on stock markets, there is no guarantee of returns. Also there is widespread worry that salaries will be frozen or cut to pay for the new scheme.

The coalition is looking at different pension schemes to find ones that offer better security to retiring employees.

Steve Webb, the Minister for Pensions, has confirmed that the government is investigating several avenues that could become a new ‘defined ambition plan’.

The government are trying to find replacements for the final-salary pension, which many private companies are abandoning due to the high cost to the employer.

Mr Webb was interviewed on the Radio 4 Today programme and said: “Firms would like to offer their employees some sort of certainty but without all the costs and burden they already face.”

Many FTSE 100 companies have recently been in the headlines for ending their final-salary pensions to new starters, with oil giants, Shell, being the latest.

The business group, the Institute of Directors, is also unsure how any new proposed pension schemes will work in the future. Spokesman Malcolm Small said: “We are pretty clear that employers are going to be very nervous about anything that involves guarantees,”

“It is going to be pretty unattractive to employers.”

Final-salary schemes were traditionally popular with both companies and employees, as they gave a guaranteed retirement income linked to inflation. However, with the average age expectancy constantly increasing, these schemes have proved to be too costly for many companies.

Many employers have changed their company pension schemes to defined-contribution ones where employees pay into investment funds, taking the financial risk off the company.

Defined-contribution plans make it difficult for staff to gauge how much their retirement income will be as the schemes rely on the stock market’s performance.

She continued: “The investment markets haven’t worked out in a way that many people who are saving for a pension thought they would, and we are now struggling to find some way of giving workers back a bit of certainty, while employers are saying ‘we don’t want those risks’.”

The Minister for Pensions is searching for a scheme where the financial risks are split more fairly between the company and worker.

One such scheme under review is the cash-balance scheme which is currently being used by supermarket chain, Morrisons. The cash-balance model gives the employee a fixed pension pot which they have to invest themselves.

The coalition has also looked at pension models in countries where risk sharing pensions are more common.

The coalition has warned that ‘gold-plated’ pension payouts to employees is about to go into freefall as the UK enters a ‘different world in pensions’.

Analysis compiled by the Department for Work and Pensions shows that the average value of final-salary pension schemes will peak in 2012 at £7,100 a year. However, its figures also predict that this will decrease year on year for the next 50 years.

It estimates that the average pension will only be worth £2,400 a year in 2060.

Pensions Minister, Steve Webb, said: ‘It is clear that we are facing a different world in pensions.

‘A generation ago, employers provided final salary pensions and took on all the uncertainty. It was the perfect retirement solution for those lucky enough to have one.’

The decline in pension income—which not so long ago saw millions of workers able to retire at 55 or 60 on an inflation-proof, gold-plated retirement income—has been accelerated by the fact that fewer and fewer private sector employees will retire with this type of defined-benefit pension.

The overall majority of younger people working in the private sector now are not in any company pension scheme, and very few have the luxury of being offered a final-salary pension scheme.

Currently, only 10% of private sector companies still operate final-salary pension plans that allow new staff to join, this looks set to fall further as more companies take the decision to end defined benefit pension schemes to new recruits.

The average value of a defined benefit pension is 27% of the final salary. In contrast, the more preferred option of a defined contribution pension has a much lower value of between 7.5% and 13% of salary.

In addition to this, the raising of the state pension age to 66 by 2020, and 67 by 2026 means even lower retirement incomes in the future.

In an effort to help to calm the pension crisis, the new Automatic Enrolment Scheme comes into effect in October, where all employees over the age of 22 will be automatically enrolled into a company pension if they earn more than £8,105.

Mr Webb said: ‘Workplace pension reforms are critical, bringing millions of people into pension saving for the first time.’